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Best Buy's Not Dead But It's Far From Thriving

NEW YORK (TheStreet) -- Corporate turnarounds are never easy. I was never in the camp of those who thought beleaguered retail giant Best Buy could escape the grasp of Amazon.

Amazon has been stealing customers away through its online ecommerce platform, while Best Buy's margins were being squeezed on the ground by, among others, Wal-Mart.

The company's founder and largest shareholder, Richard Schulze, had seen enough and offered to take the company private last year for about $24 to $26 per share. At the time, shares of Best Buy were trading for a fraction of where they are today. At the time, I felt that this was a deal that shareholders couldn't pass up.

Well, what a difference seven months makes. Since reaching the $11.25 low of last November, the stock is up 150%. Not only does Best Buy appear to have new life, but the Samsung partnership, which introduced the "store-within-a store" concept to help Samsung combat Apple's retail advantage, seems to have added an extra layer of relevance to the once-struggling big box chain.

However, I wouldn't get carried away here.

While signs are pointing upward for Best Buy, I caution investors about getting ahead of themselves and repeat past mistakes of expecting too much. Granted, the most recent quarter was modestly improved but there was still plenty of bad news, including a 10% year-over-year revenue decline and a 1.3% drop in same-store sales. These are not quick-fix metrics.

Elsewhere, it doesn't seem as if Best Buy's management has figured out ways to keep Amazon and Wal-Mart from picking off its electronics business, which was down roughly 12% this quarter despite improvements in merchandising and showroom advancement. Although areas such as appliances and phones posted growth of 12% and 8%, respectively, these were negated by a 17% decline in entertainment.

I really want to like Best Buy again, especially after seeing all of these efforts. Plus I've been wrong in the past. But the eroding margins are still discouraging. Gross margin shed 180 basis points while operating margin declined by 70 basis points to 1.8%. Although this was still enough to beat estimates, the 36% decline in operating income still stood out like a sore thumb.

The level of improvement needed to turn these figures around is going to take longer than investors expect. The question is how much more time investors are willing to spend.

More important -- is it worth sacrificing 150% worth of gains?

I don't want to make this sound as if it was all bad news. For instance, Best Buy showed meaningful progress in its online business, which grew 16% in the U.S. This is a pretty significant jump as the company tries to catch Amazon's online dominance. Plus, the company deserves plenty of credit for showing a new commitment to the customer experience. I didn't believe that still mattered.

Here again, out of frustration I had given the company no credit whatsoever for this idea when, at Best Buy's analyst day last year, management made indistinct mentions about "reinvigorating the customer experience." Nobody really knew what that meant. Today, however, this initiative seems to be paying off handsomely.

Along similar lines, management's new approach towards raising the liveliness of its showrooms while showcasing the brands that appeals the most to its customers seems to be making a difference. These and other merchandising strategies helped the company advance profitability, although there's still plenty of room for improvement as well as operational deficits that Best Buy management needs to fix

The Street seems encouraged that the company is on the right path. Plus it does appear as if customers are responding well to Best Buy's "price match" guarantees. To the extent the Samsung partnership can help boost against Wal-Mart, Best Buy may benefit from some incremental traffic. But I'm not expecting this will completely erase the disadvantage against Amazon's online presence.

In that regard, these initiatives, while improved, have failed to boost comps to the level that management expected. But if not now, when?

Accordingly, I believe the best way to play Best Buy is for investors to take more of a cautiously optimism approach, especially with the gigantic leap that the stock has already experienced. Should the stock fall 20% to, say, $22 per share, then that's an entirely different discussion.